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WeWork Has Sent a Distress Signal. Here’s What to Know.

WeWork, which promised to revolutionize the way people work alongside one another, announced in a financial filing Tuesday that it had “substantial doubt” that it would stay in business. That declaration raises questions about not only the company’s viability but also the future of commercial real estate.

Here’s what you need to know about WeWork’s past and prospects.

WeWork was founded in 2010 by Adam Neumann and Miguel McKelvey, tech entrepreneurs who used the funds from the sale of their previous co-working start-up, Green Desk.

WeWork’s vision was to create a “physical social network” that would appeal to a new class of workers who were freelancing or working from home.

The business model was to sign long-term leases for office buildings (or individual floors), spruce up those spaces and rent them to freelancers and companies. The company would attract clients, the thinking went, by offering incentives like beer and hard kombucha as well as chic interior design — and would charge them enough to make a profit after WeWork made its lease payments.

The good feelings would not last.

By 2019, when WeWork was the largest private tenant in Manhattan, investors raised questions about the company’s shaky financial footing. The company had reported sizable losses for years, including nearly $2 billion in 2018. In October 2019, it was forced to withdraw its initial public offering after investors balked at buying its shares. Banks also became more reluctant to lend it money.

In the end, the company’s valuation plummeted from a peak of $47 billion in January 2019 to $7 billion late that year, as it was bought out by the Japanese investment holding company SoftBank. WeWork laid off thousands of workers, and Mr. Neumann resigned. Since then, he has received more than $700 million from selling stock to SoftBank and from cash payments.

In February 2020, the company announced that Sandeep Mathrani would take the reins. Under Mr. Mathrani, WeWork went public in October 2021 through a merger with a special-purpose acquisition company.

But three months ago, after overseeing a financial restructuring, Mr. Mathrani abruptly announced his departure. The company’s stock had been falling since it began trading, and Mr. Mathrani’s exit raised fresh questions about WeWork’s financial footing.

Aswath Damodaran, a professor of finance at New York University, said he had been skeptical of WeWork’s business model from the start.

“In the good times, you’re going to fill up your building,” he said. “In the bad times, they’re going to leave, and you’re going to be left with an empty building and a payment to make.”

In its statement on Tuesday, WeWork said it was worried about its ability to remain “a going concern.” In accounting terms, being a going concern refers to a company’s capacity to make enough money to stay afloat.

Typically, the term doesn’t come up unless a company is facing a possible bankruptcy within a year. Companies are required by law to disclose such doubts.

WeWork said it aimed to reduce its lease costs and other expenses, increase revenue and obtain “additional capital via issuance of debt or equity securities or asset sales.”

But there’s reason to question whether WeWork will fold in the near future. According to Mr. Damodaran, the declaration of its critical condition might actually give it more leverage with landlords and other creditors and allow it to limp along.

“Nobody wants to push them over the edge,” Mr. Damodaran said. “If you’re a lender to WeWork, the last thing you want to do is end up in bankruptcy court giving away half your assets to the lawyers.”

In a statement to investors on Wednesday, WeWork said that it was considering “a range of operating plans” to continue as a going concern, including “targeted investments to reduce member churn, drive new desk sales and increase occupancy.”

WeWork had more than 18 million square feet of rentable office space in the United States and Canada at the end of last year, according to a financial filing, so its failure could have a sizable impact on the commercial real estate industry.

The forces that drove down commercial real estate prices over the past few years — including the shift to remote work during the Covid-19 pandemic — are the same ones responsible for WeWork’s decline, according to Stijn Van Nieuwerburgh, a professor of real estate at Columbia Business School.

Mr. Van Nieuwerburgh said that his research currently estimated a 10-year decline of 45 percent in the valuation of office space, from 2019 to 2029.

Vacancies in office space have been rising across the country since the pandemic, to around 20 percent in the first quarter of 2023, according to the real estate services firm JLL.

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Mohammad SHiblu

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